Following on from our recent article on the Companies (Prohibition of Bearer Shares) Act 2011, which highlighted the risks associated with members remaining anonymous (including fraud, concealment of assets and undisclosed transfers of beneficial ownership); the Companies (Beneficial Ownership) Act 2012 (the "Act") further demonstrates the Isle of Man's commitment to seeking transparency in the ownership of companies.
Royal Assent was given to the Act on 11 December 2012. However, the operative provisions of the Act are yet to come into operation. Given that the intention of the Act is to comply with an International Monetary Fund ("IMF") recommendation, it is likely that the appointed day order bringing the operative provisions of the Act into force will be passed in the not too distant future.
The Act, which requires certain companies to appoint nominated officers to hold information about their beneficial owners, will apply to all companies that are incorporated under the Companies Acts 1931 to 2004 ("1931 Act Companies"). The Act does not apply to companies that are incorporated under the Companies Act 2006 ("2006 Act Companies").
The purpose of the Act is to address a recommendation of the IMF following its visit to the Island in 2008/2009 in respect of Recommendation 33 of the 40 Recommendations of the Financial Action Task Force (the "FATF") published in June 2003 (which have since been revised). Both recommendations address access to beneficial ownership and control of legal persons.
The Isle of Man strives to ensure that the international community recognises that it conducts its affairs in an open and transparent manner. In furtherance of this goal, the Island submits to inspections conducted by supra-national bodies such as the IMF and the Organisation for Economic Cooperation and Development.
In 2008/2009 the IMF conducted a Financial Sector Assessment Programme on the Isle of Man which considered, amongst other things, the Island's compliance with international standards for anti-money laundering and countering the financing of terrorism.
The IMF scored the Isle of Man as "broadly compliant" in respect of its ability to provide the appropriate authorities access to the beneficial ownership information of companies where a proper request for information has been made.
The FATF Recommendation 33 includes an obligation to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.
Essential Criterion 33.1 of the FATF's methodology for assessing compliance with the FATF 40 Recommendations and the FATF 9 Special Recommendations published on 27 February 2004 and updated in February 2009 (the "FATF Methodology") states "Countries should take measures to prevent the unlawful use of legal persons in relation to money laundering and terrorist financing by ensuring that their commercial, corporate and other laws require adequate transparency concerning the beneficial ownership and control of legal persons".
Essential Criterion 33.2 of the FATF Methodology states "Competent authorities should be able to obtain or have access in a timely fashion to adequate, accurate and current information on the beneficial ownership and control of legal persons".
A significant number of 1931 Act Companies are clients of licensed corporate service providers. All corporate service providers have an existing obligation to identify and hold information on the beneficial owners of their clients under the Isle of Man's Anti-Money Laundering legislation and the conditions of their licences.
In light of the fact that corporate service providers are already required to identify and hold information on beneficial owners, the IMF was particularly concerned about 1931 Act Companies that do not receive the services of a corporate service provider. Although the IMF's Report noted that, for such companies, the authorities may rely on law enforcement powers to obtain beneficial ownership information, it also noted that it is questionable how complete, accurate and current such information would be.
In light of the above and based on the IMF's interpretation of the FATF Recommendations and the FATF Methodology, the IMF recommended that "The authorities are advised to put in place measures to ensure that accurate, complete and current beneficial ownership information is available for all 1931 Companies. One approach would be to require the filing of beneficial ownership information with the Company Registry in cases where a licensed corporate services provider is not utilized."
The current position in respect of the requirement for knowledge of beneficial ownership of 1931 Act Companies is that the identity of beneficial owners is only required to be known by persons undertaking relevant business (e.g. corporate service providers) in respect of their clients. The Act introduces a requirement for all 1931 Act Companies to ensure that they have knowledge of their beneficial ownership. This will ensure that beneficial ownership information will be available to the authorities, where appropriate, for all 1931 Act Companies irrespective of whether they receive services from a corporate service provider.
The Act does not apply to 2006 Act Companies as such companies are required to appoint a registered agent. Registered agents are required to identify and hold information on the beneficial owners of their clients under the Isle of Man's Anti-Money Laundering legislation and the conditions of their licences.
The Act does not introduce a new power for law enforcement bodies to obtain beneficial ownership information. It simply introduces a new obligation that requires a specific person within a 1931 Act Company (the nominated officer) to have access to information regarding the beneficial ownership of membership interests. The identity of beneficial owners will not be a matter of public record under the Act.
Salient features of the Act
Section 4 of the Act exempts some companies from the scope of the Act. This considers those circumstances where the size of the membership of companies and the frequency with which membership may change makes it impractical to include them within the scope and relies on other rules being in place (such as those of a regulated stock exchange). The Treasury has the power to grant further exemptions by order.
Section 5 requires every company to which the Act applies to have a nominated officer (who must be either a Manx resident individual or a corporate service provider licensed by the Financial Supervision Commission).
Section 6 sets out the information that a company must hold in respect of its nominated officer. The Department of Economic Development (the "DED") must be notified who the nominated officer is and of any changes to the details of the nominated officer within one month after the date of the relevant appointment or change. Section 6(5) provides that it will be an offence to fail to comply with section 6.
Section 7 requires members of a company who do not own their membership interests beneficially (as well as legally) to give notice to the nominated officer and to provide certain required details. Section 7(4) creates the offence of, without reasonable excuse, either failing to inform the nominated officer of the details of the beneficial ownership of the interest or providing the nominated officer with information that is false, deceptive or misleading in a material particular.
Section 8 sets out the information that must be provided to the nominated officer in respect of the beneficial owner of an interest in a company in the circumstances set out in section 7.
Under section 9 a nominated officer must inform the company where he is of the opinion that a member has, without reasonable excuse, either failed to inform the nominated officer of the details of the beneficial ownership of the interest or made a statement to the nominated officer which is false, deceptive or misleading in a material particular. Section 9(3) sets out the sanctions that can be applied by a company in such circumstances.
The sanctions which a company has the ability to apply under section 9(3) include: placing restrictions on transferring the interest of the relevant member; restricting the voting rights in respect of the relevant member's interest in the company; preventing the exercise of pre-emption rights in respect of an interest held; and withholding any payments due in respect of the interest, such as a dividend payment. Alternatively, the relevant member's interest in the company may be cancelled.
Section 10 sets out the circumstances in which a nominated officer will be required to disclose the identity of the beneficial owner of an interest in the company, as well as the persons who may make a request for this information and the circumstances in which such a request may be made. Section 10(7) makes it an offence for a nominated officer, without reasonable excuse, to fail to provide information on request or to make a statement in response to a notice which is false, deceptive or misleading in a material particular.
The nominated officer will not, without an official request made within the parameters set out in section 10, be compelled to provide information about the beneficial owner of a company. This is designed to prevent 'fishing expeditions'.
Section 11 considers the offence of tipping off a person in connection with an issued or proposed request for information under section 10. The giving of legal advice or disclosure of information in respect of legal proceedings are exempted under section 11 (unless such disclosures are made with a view to furthering a criminal purpose).
Section 12 ensures that legal professional privilege is protected, where appropriate.
Section 13 provides that the penalty for offences under the Act is a fine and provides that, where an offence has been committed by a company, that company's officers will also be guilty of the offence and liable in certain circumstances. The scope of the definition of the term 'officer' for such purposes is broad and includes: a director, secretary or other similar officer; a person purporting to act as a director, secretary or other similar officer; if the affairs of the body are managed by its members, a member; and, if the body has a registered agent within the meaning of the Companies Act 2006 (which 1931 Act Companies may, but are not required to, have), the registered agent.
Consequences of the Act
As mentioned above, Royal Assent was given to the Act on 11 December 2012. The operative provisions of the Act will come into operation by an appointed day order on the day appointed by the Treasury and different days may be appointed for different provisions and different purposes.
Irrespective of when a 1931 Act Company will be required to notify the DED of the appointment of a nominated officer, all 1931 Act Companies should ensure that they are ready to comply with the requirements of section 5 of the Act (which imposes an obligation on 1931 Act Companies to appoint a nominated officer) when that section comes into force.
Section 7(4) of the Act provides criminal sanctions against members who fail to disclose true beneficial ownership to their nominated officers. However, those sanctions are only likely to be imposed where the relevant nominated officer suspects that a company member is not the beneficial owner of that member's interest in the company as the Act imposes no express obligation upon nominated officers to request details of beneficial ownership. As the Act relies upon members volunteering such information, it is likely that those members who have nothing to hide will comply with the obligations imposed upon them under the Act. Those for whom anonymity is paramount might take the view that the potential risk of sanctions is outweighed by their own assessment of the benefits of retaining such anonymity. It remains to be seen whether criminal sanctions and the possible suspension or cancellation of rights (section 9(3) of the Act) will be sufficient to prevent the mischief of undisclosed beneficial ownership in 1931 Act Companies.
In summary, although the Act, together with the Companies (Prohibition of Bearer Shares) Act 2011, goes some way to requiring transparency in the ownership of companies, those Acts cannot provide that transparency in the face of fraud. It is certain, however, that together the legislation adds to a culture of transparency in the ownership of equitable interests in shares and strengthens the Island's profile as a jurisdiction which discourages concealment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.